Uber’s “Class” Problems

Over the past few years, a substantial number commuters have come to rely on Uber as an important mode of urban transportation.  Many commuters prefer Uber over traditional taxi cabs and are willing to pay a premium for the service. There is no question that Uber provides distinct advantages over traditional cabs, albeit at a higher cost.  One primary advantage is Uber’s mobile application platform that makes it breeze to coordinate and pay for a ride.  A credible argument can also be made that Uber cars are, generally speaking, better maintained and more comfortable than traditional cabs.

Uber’s business model has been described different ways by different people.  In essence, however, Uber is simply a market maker.  It’s mobile application connects customers looking for rides for a predetermined fare to drivers willing to provide rides for the same predetermined fare.  The application uses the GPS function on mobile devices to coordinate the pickup and drop off location. Uber gets a percentage of the ultimate fare with the remainder paid to the driver. As with most elegant solutions, brilliance lies in simplicity.

But Uber’s business model is facing some serious legal trouble.  From Uber’s perspective, it does not employ the drivers who utilize its software program.  Rather, according to Uber, the drivers are independent contractors who simply utilize its software for a fee.  This approach has a number of advantages.  One significant benefit is that by classifying drivers as independent contractors Uber is able to avoid some state and federal labor laws.  The social propriety of Uber’s business model has often been questioned, but it is now facing legal challenges by drivers who believe they should be considered “employees” under California law.

A class action lawsuit captioned O’Conner v. Uber Technologies, Inc. is currently pending in the Norther District of California. The class representatives are bringing claims on behalf of a class of California drivers alleging, among other things, that Uber has wrongfully classified them as “independent contractors” rather than “employees.”  According to the class representatives, Uber drivers in California are really “employees” under California law and, as such, are entitled to certain benefits including a “tips” paid by fare paying customers.

Uber’s defense of the class action suit took a serious blow this week when Northern District of California Judge Edward Chen granted class certification for certain claims made by the representatives. (You can read the full opinion here https://s3.amazonaws.com/pacer-documents/N.D.%20Cal.%2013-cv-03826%20dckt%20000341_000%20filed%202015-09-01.pdf).  Importantly, Judge Chen certified the class for purposes of (1) determining whether, under California law, Uber drivers were improperly classified as “independent contractors” and (2) determining whether the drivers were entitled to receive the “tips” charged to fare paying customers.

Analyzing the issue of class certification under Rule 23, Judge Chen noted that the “cardinal” issue was whether the drivers’ working relationships with Uber were “sufficiently similar so that a jury can resolve the Plaintiff’s legal claims at once.”  In other words, could a jury, considering a uniform set of facts, reach a conclusion that all of the drivers were either “employees” or “independent contractors.”   If a jury could make that determination based on a uniform set of facts the suit could be properly certified as a “class action.”  Otherwise each driver would have to bring an individual suit.  It is increasing rare for class actions to be certified, but Judge Chen concluded that this case fit the mold and granted certification.

Judge Chen began his analysis by observing that there was no real dispute under Rule 23 as to the ascertainability or numerosity of the the putative class of California drivers.  Indeed, the class would include over 160,000 members and could be easily identified from Uber’s business records.  As is normally the case with a proposed class action, the rubber meets the road with respect to issues commonality and typicality. But Judge Chen did not have trouble in concluding that the putative class met these requirements as well.  He noted that for purposes of commonality, “the lawsuit must call upon the court or jury to decide at least one factual or legal question that will generate a common answer ‘apt to drive the litigation.'”  Here, that question was whether the drivers were miss-classified as “independent contractors” under California law.

Judge Chen concluded that the central question as to whether drivers were “contractors” or “employees” not only would “drive the litigation” but that it “could in fact be outcome determinative.”

The upshot of Judge Chen’s decision is that Uber is now facing serious financial exposure to a class action lawsuit that could fundamentally change the way it does business.  Of course, it is up to the jury to decide whether or not the class members are “employees” or “independent contractors,” but jury trials are extremely risky and it seems unlikely that Uber would take such a big gamble.  Stay tuned.

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